Some Managers Contend Analysts
Treat Boston Scientific Unfairly

Boston Scientific
gave Wall Street a heart attack in 1997. Now some investors bet the new year could mean a dramatic recovery for the medical-device maker.

Over the past year, the Natick, Mass., company, which sells products used in cardiac, vascular and other surgery, could have taught a course in how to anger securities analysts. Boston Scientific's disappointing first-quarter results caught Wall Street off-guard, leaving brokerage houses scrambling to revise their estimates downward. The pros griped that executives did little to explain or to prepare investors.

The stock recovered, hitting a 52-week high of $78.44 in August. But in October, the company blindsided analysts again, announcing that not only results for the third-quarter but 1998 earnings as well would fail to meet expectations. The shares, which recently traded for $46, lost 24% of their value last year.

Now, however, to contrarian investors, the stock looks like a bargain. Jim Gribbell, a portfolio manager with David L. Babson & Co. in Cambridge, Mass., says the company is making shrewd investments in its international operations and has a strong pipeline of new products.

Mr. Gribbell, whose firm owns one million shares, less than 1% of the company, says he made money in the stock last year, buying in the $40 range and trimming his position while the shares were above $70. For now, he believes Boston Scientific is being unfairly punished because it won't play the Wall Street game of guiding analysts so they can make accurate quarterly projections of sales and earnings.

In Mr. Gribbell's view, few management teams have the nerve to say to brokerage houses, "We're not going to give you guidance in the next few months, we're going to manage for the long term." Yet Mr. Gribbell -- whose firm gets similar treatment from Boston Scientific -- expects shares to reach as high as $70 again over the next year.

Another vote of confidence comes from Ned Riley, chief investment officer at BankBoston, who expects Boston Scientific to produce annual returns of 15% or more over the next few years, almost twice what he predicts for the overall market. "Their future is really bright," says Mr. Riley, whose bank recommends the stock for individual accounts.

Boston Scientific fans note that the stock is selling for a modest 21 times expected 1998 earnings, according to a survey of 23 analysts by First Call. That's a steep discount considering its projected annual earnings growth rate of 25% for the next few years. Industry peers such as
Guidant
and
Medtronic
sell for more than 30 times this year's projected earnings.

David Lothson, an analyst with PaineWebber in New York, figures Boston Scientific should double over the next 12 months as the company starts to win over investors with its business strategy. "It's really easy to love a company when its stock price is shooting through the roof," says Mr. Lothson, who has a "buy" rating on the stock. "But that's not the kind of stock people make the most money on."

Inside Track

Bulls also point to this comforting fact: Insiders own 40% of Boston Scientific's shares. And over the past six months, insiders have made net purchases of more than half a million shares, many recently. For example, in October, Chairman Peter Nicholas bought 280,000 shares for $42.75 to $45.55, according to CDA/Investnet, a Fort Lauderdale, Fla., research firm.

No one argues against Boston Scientific's promising market. With estimated 1997 sales of $1.9 billion, the company focuses on products surgeons insert into the body through natural openings or small incisions. Minimally invasive surgery saves insurers money and patients discomfort.

But, the company, which had been known for its steady growth, hit a rough patch last year because of its aggressive international expansion, which it hopes will speed new products to market and increase sales and market share.

Intense competition, weaker-than-expected overseas markets and a strong dollar all hurt results. The company also faced delays in getting new products to market.

Michael Weinstein, an analyst with J.P. Morgan in New York, acknowledges that the stock looks cheap and rates it a "long-term buy." But he doesn't set a target price, partly because he isn't sure new-product sales will kick in this year.

Meanwhile, Boston Scientific's inventories and debt are rising. Analysts expect the company to take a $15 million write-off in the fourth quarter, and Mr. Weinstein worries analysts will cut estimates again.

Silent Treatment

Last month, Cowen & Co. analyst Daniel Lemaitre suspended his rating of the company, citing executives' refusal to speak or meet with him. He believes executives were angry because he said Boston Scientific would be late in introducing a new coronary stent, a device used to keep arteries in the heart open.

Larry Best, Boston Scientific's chief financial officer, says the company asked Mr. Lemaitre to drop coverage. Boston Scientific claims the analyst had been spreading incorrect information about the stent, which Mr. Best insists is still on schedule for a mid-1998 launch.

Mr. Best says inventories and debt are rising only because the company has been investing in new plants and systems to digest recent acquisitions. As for concerns about keeping analysts informed, Mr. Best says the company operates in a dynamic health-care market that just can't be forecast on Wall Street's quarterly timetable. He notes that he cautioned analysts in 1996 that they were growing too optimistic.

"We have always told investors, if you're interested in a 90-day or 180-day horizon, you shouldn't own our stock," he says. "We could not have been more clear. We're building for the long term."

Some money-management firms are lining up firmly with management. Even after scaling back expectations, the company expects enviable revenue growth of 20% to 25% next year and earnings growth of more than 30%.

"Sometimes Wall Street is very shortsighted," says Karen Ciszewski, analyst with Boston's Freedom Capital Management, a Boston Scientific shareholder. "If you look beyond the occasional mishap and you look at the products and the organizations they've been able to build, it's a phenomenal company."

***

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***

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